UAE insurers say an overhaul of insurance accounting that will standardise the way insurance contracts are issued as well as their valuation will require a period of adjustment for data collection that may hurt profitability in the short term, but it will strengthen the industry in the long term.
“The new accounting standard will have a significant impact on the insurance sector both in terms of operating model and financial results, which may require a major shift in the way data is collected, stored and analysed and thus it will be a lengthy and complex exercise,” said Elena Stukanova, the executive vice president finance and administration at Oman Insurance.
“However, we expect the standard would bring an increase in transparency as to how insurance liabilities are recognised, and perhaps addresses many inconsistencies in the existing insurance accounting principles.”
The International Accounting Standards Board said last week that the new standards, IFRS 17, will replace IFRS 4. The new standards will make insurers provide more accurate assessments of the value of their assets on financial statements. The board said the changes were especially needed to ensure investors are not exposed to too many risks.
Insurance companies worldwide hold US$13 trillion in assets, about 12 per cent of total assets held by all listed companies, and in recent years in the wake of the global financial crisis many other financial services providers such as banks have taken steps to mitigate risks to their businesses.
“The existing Standard IFRS 4 allows to insurers to account differently for insurance contracts they issue, if those contracts are similar,” the International Accounting Standards Board said. “Further, many insurers’ financial statements lack regular updates of the value of insurance obligations to reflect the effect of changes in the economic environment such as changes in interest rates and risks.”
The changes to international accounting standards came at a time when UAE insurers are facing other challenges including a crowded market and an economy whose growth has slowed over the past couple of years amid falling oil prices.
While there have been a number of catalysts for the growth of the insurance industry in the UAE over the past year, its profitability has been weighed by cut-throat competition. Many insurers have popped up in recent years and a number of them are struggling to be profitable. That has made it difficult for some to stay afloat, especially those that made risky investments in the stock market and suffered heavy losses.
There are 91 registered insurance companies in the UAE, according to the Insurance Authority. While this is good for consumers, it has led to losses among many insurers as prices for insuring everything from cars to houses fell.
Some have quit the non-life insurance business altogether in the UAE, such as Zurich, which exited in November 2015.
mkassem@thenational.ae
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